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As the country tries to recover, it is also dealing with its relationship with Russia

Russia, now being ostracized by the West, is a significant investors in Cyprus

Cyprus, the tiny Mediterranean island bailed out a year ago, remains "in difficulty...but not as bad as one would have expected," its finance minister Harris Georgiades told CNN during an interview in the capital city Nicosia.

The country, which was given a 10 billion euro ($13.7 billion) injection by the European Union and IMF ago after its banking system collapsed, was the smallest of the euro economies to get help during the bloc's financial crisis.

Unlike the Greek economy which has seen more than a quarter of its GDP wiped out during the past five years, the finance minister said that Cyprus will lose about half that. The European Commission is now forecasting growth in 2015 after a steep contraction of 4.8% this year and 6% percent last year.

According to Georgiades, the situation is "bad and I have never tried to paint a rosy picture." The country has been "dealing with shortcomings and there were significant shortcomings, we have to admit."

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Cyprus, crippled by losses on Greek debt, set a precedent in the euro crisis by imposing losses on bank depositors. It was a move which infuriated savers, worried investors and pushed the euro crisis back into the headlines.

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But Georgiades said the country's main mistake was letting the crisis escalate. "We should have seen action both on behalf of the Cypriot authorities and the EU two years ago," he said.

One of the key challenges during the rebuilding effort is dealing with an estimated $40 billion of non-performing loans which are holding back fresh lending.

When asked if a "bad bank" could be set up to absorb those loans, Georgiades said the banking sector and supervisory authorities "need to work in a coordinated effort to deal with this problem," but added, "I would say that all the possibilities should be left on the table."

Meanwhile, Cyprus' relationship with Russia is under pressure as the West increases economic pressure on Vladimir Putin's government and his allies. Relations with the West fractured after Russia's military intervention in Crimea and its amassing of troops on Ukraine's border.

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Russians are strategic investors in Cyprus, and wealthy individuals have long been drawn to the island and its low tax rates. A total of $30 billion has been invested by Russian companies over the past two decades, according to the Russian statistical agency ROSSTAT, putting Cyprus just behind the Netherlands as the top EU recipients.